Having reviewed the initial administrative matters, what impact has TCJA had on marriage and divorce?
People are marrying at older ages which means they are generating larger incomes and potentially more wealth before they stand at the altar for the “I do”. It would seem prudent that a pre-nuptial now assumes a more important role in the pre-wedding planning. I would suggest that one of the terms of the pre-nuptial be that each year a computation be made allocating each person’s share of the joint tax liability to determine which mate provided more of the withholdings/estimated tax payments to cover the joint liability and that a payment be made from one spouse to the other to cover his/her shortage. It is a computation that the tax preparer can easily make when the returns are completed and it can be part of the documents submitted by the tax preparer to his clients to review before they sign the e-file authorizations.
That requirement will help overcome the problems discussed above by putting each of them on notice that an annual tax return filing must be made. A pre-nuptial is used in first-time marriages, where each person is bringing significant assets to the union and it is easier to trace the respective sources of that wealth. This agreement is also used in second marriages where each has wealth and the sources may not be as easily traceable (This is especially true if one of them inherited wealth due to a death of the prior spouse. Be sure the estate tax return of the decedent is available as a permanent record to the document.).
In the case of a second marriage, the couple may elect to file separate tax returns even though it may be more costly in order not to go through the annual computation referred to above and that each one need only concern himself/herself with his/her assets. This couple may also seek advice from their attorney before purchasing any substantive assets jointly.
The alimony deduction was repealed by TCJA and affects all final divorces after December 31, 2018. As indicated above, any pre-December 31, 2018 final divorces or separation agreements that were modified subsequently carry the same results as the pre-December 31, 2018 agreements unless the modification stipulates that the new law will apply. Both ex-spouses must agree to this modification. It may not be done unilaterally by one of them.
The TCJA suspended the miscellaneous deductions subject to the 2-percent of adjusted gross income through the year 2025. There were allowable professional fees that could have been claimed in the past if incurred in connection with taxable alimony and divorce-planning.
A caveat regarding this section is that one must review the state laws as they impact alimony and certain other deductions under TCJA. If the states have decoupled from TCJA there may be some tax planning and negotiating between the parties for whatever benefits may accrue to the family unit, similar to what was done under the old rules
Under the new law, there has been a reduction in the corporate tax rate from 35 percent to 21 percent, addition of a new deduction of 20 percent for business pass-through entities and changes in the immediate deductibility of additions for equipment and fixed assets. These changes mean that businesses will have more after-tax cash available for the owners to withdraw and will impact the valuation of the business entity and the possible negotiations for property settlement.
The three installments of this article were not meant to be all-inclusive but to highlight some of the major considerations that are significant as divorces proceed under the current tax law. I did not touch on areas like personal exemptions, which are suspended through the end of 2025, nor did I discuss child support, whose computation may change as a result of TCJA, or the computation of the child tax credit, which TCJA modified. These areas will probably arise as the negotiations between the parties continue. As the primary advisor in the negotiations make sure to have other knowledgeable professionals, experienced in these areas, available as part of your team to present the best case for your client.